01—Abstract
Summary
Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.
Southern Peru Copper Corporation (SCCO/PCU) reported a strong 2003 as copper prices rose and volumes and by-product credits improved.
Net sales rose 20% to $798.4 milliona from $664.6 million, operating income nearly doubled to $216.8 million from $119.0 million, and net earnings reached $119.2 million, or $1.49 per share, versus $60.6 million ($0.76) in 2002. Mine copper output increased 8.1% to 826 million pounds, and operating cash cost fell to 39.9 cents per pound from 45.6 cents, helped by molybdenum by-product credits. Cash rose to $295 million, operating cash flow was $191 million, and total debt increased to $349 million.
The filing's most important forward-looking items are the Ilo smelter modernization, now estimated at $320 millionb (down from over $600 million) and due for completion before January 2007 under a PAMA deadline, and the Toquepala leach dump project, budgeted at $69.7 million. Budgeted 2004 capital expenditures are $290.1 million. Investors should also note the 3% increase in the Peruvian income tax rate to 30%, which required a $10.1 million deferred tax charge, and the pending Grupo Mexico proposal, announced February 3, 2004, to sell Minera Mexico to the company in exchange for new shares.
A special committee of disinterested directors is evaluating that proposal, and it could create a single listed class of common stock. Ownership is concentrated, with Grupo Mexico's indirect affiliate holding 54.2%c after the March 2003 transfer from Southern Peru Holdings to AMC.
Risks include copper price volatility, Peruvian political and tax exposure, concentration of all operations in southern Peru, and the unresolved IRS and SUNAT tax disputes. Dividends were $0.57d per share in 2003, and a $0.27 dividend was declared for March 2004.
02—Key points
Key Highlights
- Net sales rose 20% to $798.4 million, and net earnings more than doubled to $119.2 million ($1.49 per share) from $60.6 million in 2002.
- Operating income reached $216.8 million, up from $119.0 million, aided by higher copper prices (LME average $0.81/lb vs. $0.71) and a 41% rise in molybdenum prices.
- Operating cash cost fell to 39.9 cents per pound from 45.6 cents, a 12.5% improvement, with molybdenum by-product credits of 13.0 cents per pound.
- Mine copper production rose 8.1% to 826 million pounds, driven by the Toquepala concentrator expansion completed in September 2002 and higher Cuajone ore grades.
- The Ilo smelter modernization cost estimate fell from over $600 million to $320 million, with completion targeted before January 2007; 2004 capex is budgeted at $290.1 million.
- A $10.1 million deferred tax charge resulted from Peru's increase in the income tax rate to 30%, pushing the effective tax rate to 41.1%.
- Grupo Mexico proposed on February 3, 2004 to sell Minera Mexico to the company in exchange for new shares; a special committee is evaluating the deal, which could consolidate the dual share classes into a single listed class.
03—Questions
Frequently Asked Questions
How profitable was Southern Peru Copper in 2003 compared with 2002?
Net earnings were $119.2 million ($1.49 per share) in 2003, up 97% from $60.6 million ($0.76 per share) in 2002. Net sales grew 20% to $798.4 million, and operating income grew 82% to $216.8 million. Gains came mainly from higher copper and molybdenum prices and higher sales volumes, partly offset by the higher tax rate and a $17.8 million workers' participation expense.
What are the main risks to the company's outlook?
The company is highly exposed to copper prices, which the filing describes as cyclical and volatile. All of its revenue comes from Peruvian operations concentrated within a 48-kilometer radius, so political, regulatory, and currency risks are significant. Tax exposure is also notable: the 30% Peruvian rate applies from 2004, and IRS and SUNAT disputes remain open. Ongoing labor claims by former employees over investment shares and the new Peruvian mine closure law, whose cost cannot yet be estimated, add further uncertainty.
How is the company funding its capital program, and is its balance sheet strong?
At year-end 2003, cash and marketable securities were $295.5 million and total debt was $349 million, up from $299 million. Debt was 20.9% of total capitalization. The company issued $50 million of Peruvian bonds in 2003 under a $750 million program, of which $199 million has now been issued. Operating cash flow was $191 million. Management states it can meet 2004 cash needs from internal funds, cash on hand, and external financing if required. Both the Mitsui loan and the bond program require minimum stockholders' equity of $750 million, and the company was in compliance.
What is the Grupo Mexico proposal, and why does it matter to shareholders?
On February 3, 2004, Grupo Mexico, the majority holder, proposed that the company acquire 99% of Minera Mexico, which holds substantially all of Grupo Mexico's Mexican mining assets, in exchange for newly issued shares. A special committee of disinterested directors is evaluating whether the deal serves stockholders' interests, and the filing says there is no assurance an agreement will be reached. If completed, the transaction would collapse the Class A and common share structure into a single class listed on the New York and Lima exchanges, which would change share ownership and governance.
What dividend has the company paid, and what is its policy?
The company paid $0.57 per share in 2003, up from $0.36 in 2002. On February 3, 2004, it declared a $0.27 per share dividend ($21.6 million), payable March 9, 2004. The board says the dividend policy will consider the current capital investment program and expected future cash flow. The Peruvian bond program limits stockholder dividends to 50% of net income for any fiscal year.
04—Continue